Milton Friedman on Hayek’s “Road to Serfdom” 1994 Interview 2 of 2

FRIEDMAN: In the first course in economics at the University of Chicago in 1932. We took the same course. It was Jacob Viner’s Economic Theory, and, as it happened, Jacob Viner seated his students alphabetically in order to be able to remember their names, and so Rose Director, which was her name, sat next to Milton Friedman. In addition, as Rose always says, she was the only girl in the class at the time.

LAMB: When did you decide to write books together, and how did you separate the responsibility?

FRIEDMAN: Well, that’s very hard to answer. We were married in 1938, six years after we first met, and then we had children. Rose did a wonderful job in really taking care of the house, raising children and being an inspiration to me. But she had a professional career before that. She had written some things and worked in research organizations before that. But it wasn’t until the kids were grown up and off to college that she was able, really, to spend the time working with me. Capitalism and Freedom was based on a series of lectures that I had given at a kind of summer school, and she took those lectures and reworked them into the book, so really she should have been a joint author on that as well.

LAMB: Janet and David?

FRIEDMAN: They’re my children.

LAMB: You dedicate Capitalism and Freedom to them. Where are they?

FRIEDMAN: Janet’s at Davis, Calif. She’s a lawyer, but her husband is a computer specialist who teaches at the Davis Branch of the University of California. My son David is now — well, he’s had a checkered career in the sense that he got a degree in physics, a Ph.D. in physics, but he’s become an economist. He never took a course in economics except over the dinner table.

LAMB: Where is he?

FRIEDMAN: He’s at the University of Chicago in the law school where he does research in law and economics.

LAMB: When did you win the Nobel Prize and for what?

FRIEDMAN: I won the Nobel Prize in 1976, and I won it for none of those things, but for Monetary History of the United States and an earlier book of mine called A Theory of the Consumption Function, which, I may say, are funny things. A Theory of the Consumption Function is, in my mind, the best thing I ever did as a piece of science. Monetary History is undoubtedly the most influential, and Free to Choose is the best selling, so they are not similarly characterized.

LAMB: I’m going to take it even a step lower, if you will. I want you to tell a little bit of the pencil story.

FRIEDMAN: Oh, sure. I’d be delighted to.

LAMB: Your picture on this book has you with a pencil in your hand.

FRIEDMAN: That didn’t originate with me. I got it from Leonard Read, who was the head of the Foundation for Economic Education. It’s used to tell how the market works, and it’s used to tell how people can work together without knowing one another, without being of the same religion or anything. The story starts like this: Leonard Read and I held up a lead pencil — so-called, one of these yellow pencils — and we said, “Nobody knows how to make a pencil. There’s not a single person in the world who knows how to make a pencil.” In order to make a pencil, you have to get wood for the outside. In order to get wood, you have to have logging; you have to have somebody who can manufacture saws. No single person knows how to do all that. What’s called lead inside isn’t lead. It’s graphite. It comes from some mines in Latin America. In order to be able to make a pencil, you’d have to be able to get the lead. The rubber at the tip isn’t really. Nowadays it isn’t even natural rubber, but at the time I was talking, it was natural rubber. It comes from Malaysia, although the rubber tree is not native to Malaysia but was imported into Malaysia by some English botanists. So in order to know how to make a pencil, you would have to be able to do all of these things. There are probably thousands of people who have cooperated together to make that pencil. Somehow or other, the people in South America who dug out the graphite cooperated with the people in Malaysia who tapped the rubber trees, cooperated with maybe the people in Oregon who cut down the trees. These thousands of people don’t know one another. They speak different languages. They come from different religions. They might hate one another if they saw them. What is it that enabled them to cooperate together? The answer is the existence of a market. The answer is the people in Latin America were led to dig out the graphite because somebody was willing to pay them. They didn’t have to know who was paying them; they didn’t have to know what it was going to be used for. All they had to know was somebody was going to pay them. Indeed, going back to Hayek, one of the most important articles he ever wrote — it doesn’t show up in the book — was about the way in which prices are an information mechanism, the role of prices in transmitting information. Let’s suppose there’s a great increase in the demand for graphite. How do people find out about that? Because the people who want more graphite offer a higher price for it. The price of graphite tends to go up. The people in Latin America don’t have to know anything about why the demand went up. Who is it who’s willing to pay the higher price? The price itself transmits the information that graphite is scarcer than it was and more in demand. If you go back to the pencil thing, what brought all these people together was an enormous complex structure of prices — the price of graphite, the price of lumber, the price of rubber, the wages paid to the laborer who did this and so on. It’s a marvelous example of how you can get a complex structure of cooperation and coordination which no individual planned. There was nobody who sat in a central office and sent an order out to Malaysia, “Produce one more thimble of rubber,” or sent a signal. It was the market that coordinated all of this without anybody having to know all of the people involved.

LAMB: How many times have you told that pencil story?

FRIEDMAN: Well, I really haven’t told it that many times. I told it in the TV program and then I told it in the book, but I think this is the third time.

LAMB: You’re living in San Francisco, where we are. What brought you here?

FRIEDMAN: When I reached the age of 65 — I was at that time living in Chicago and teaching in Chicago — I decided I had graded all the exam papers I was going to grade. My wife grew up in Portland, Ore., and she was in love with San Francisco. She tried to move us out here many times during our life together, but she never succeeded until I decided I was going to retire from active teaching. Fortunately, the Hoover Institution at Stanford University offered me the opportunity to be a fellow at Hoover so I could continue my research and writing without doing any teaching.

LAMB: Peter Robinson, who is a “Booknotes” that people will see at another time, said that he got an MBA from Stanford and never once did anybody bring up Adam Smith or Milton Friedman.

FRIEDMAN: I can believe that.

LAMB: Why would that be?

FRIEDMAN: Because you still have, although it’s not the same as it was in 1963 — there’s more tolerance for the kind of ideas I am in favor of. The general academic community is very much socialist in the sense in which Hayek speaks of the socialists. The general academic community, nowadays it’s labeled political correctness. The ideas of Adam Smith, the ideas of Friedrich Hayek, of Milton Friedman are not very congenial to those who believe that the way in which you get things done is by having government come in and do them.

LAMB: You said earlier that you’re an old man. Do you feel like an old man?

FRIEDMAN: Physically at the moment I do, but not intellectually.

LAMB: Why physically?

FRIEDMAN: I recently had an operation on my back, which had some side effects from which I’ve been very slow in recovering.

LAMB: How old are you now?

FRIEDMAN: I’m 82 years old.

LAMB: Other than this operation, do you think differently because you’re an older person?

FRIEDMAN: No, no.

LAMB: Do you have things you want to accomplish?

FRIEDMAN: Absolutely. My wife and I are in the process of trying to write our memoirs.

LAMB: What in that process are you finding? Is it hard?

FRIEDMAN: Yes, because when you start digging back into your past, you find that you’ve forgotten so much and there’s so much to dig out.

LAMB: What’s the purpose of the memoir?

FRIEDMAN: Well, that’s hard to answer. The purpose of the memoirs is we have been very fortunate people. In fact, our tentative title for it is Two Lucky People. We’ve been very fortunate in our life. We’ve had a great deal of activity. We’ve spent a long time. We’ve been able to be at the center. For example, we spent years with the New Deal in Washington. I was involved in wartime research during the war. We’ve lived through and been associated with a lot that has gone on, and we believe that people have forgotten that story. We’re not mostly interested in telling about ourselves, but we want to tell about the world in which we grew up and the world which enabled us, both of whom came from families which by any standard of today would have been regarded as below the poverty level, but neither her family nor mine ever thought of themselves as poor. They weren’t poor. They didn’t have a very high level of income, but they weren’t poor. Unfortunately, the world is moving in a way in which that is no longer likely to be the case. We think maybe we have a story to tell that will be of interest to the public people at large.

LAMB: How are you going about it?

FRIEDMAN: By writing it.

LAMB: Separately, together? Do you dictate?

FRIEDMAN: No, no. In a word processor mostly. Sometimes by hand, but mostly in a word processor. But the way we’ve always done it. We each write parts of it, and then we share it and so on. I don’t believe the problem of collaboration is a very difficult one.

LAMB: How far away are you from completing it?

FRIEDMAN: We’re about halfway through.

LAMB: What size will it be when it’s finished?

FRIEDMAN: I don’t know. At the moment, it’s about their big, but how big it’ll be, I don’t know. We’re up into the 1950s.

LAMB: As you look around today and watch the world move, where are the influences in the society today? Do books influence? Newspapers? Television?

FRIEDMAN: I would say the television has a tremendous influence, but I think books also have an influence. It’s not easy to answer that question. That’s a very sophisticated and subtle question, and I don’t have an easy answer to it. I think experience plays an enormous role. The collapse of the Berlin Wall, for example, was undoubtedly the most influential action for the last hundred years because it put finis to an attitude. The general attitude had been that the future was the future of government, that the way in which you got good things done was by having government do it. I believe the collapse of the Berlin Wall and the exposure of what was happening in Russia, the contrast between East Germany and West Germany has been made a lesson; more recently, the experience of East Asia, of Hong Kong, of Singapore. Today people may not behave in accordance with their knowledge, but everybody knows that the way to develop and to improve the lot of people is through private markets, free enterprise and small government. We’re not practicing what we should be preaching. I’ve been saying that the former communist states are trying as hard as they can to go to where we were 50 years ago, whereas we’re trying as hard as we can to go to where they were 10 years ago.

LAMB: Why?

FRIEDMAN: Because of the inertia and the drive for power. It’s very hard to turn things around. The big problem with government, as Hayek points out, is that once you start doing something, you establish vested interests, and it’s extremely difficult to stop and turn that around. Look at our school system. How is it our school system is worse today than it was 50 years ago? Look at the welfare state. We’ve spent trillions of dollars without any success. But unsuccessful experiments in government — I’ve said if an experiment in private enterprise is unsuccessful, people lose money and they have to close it down. If an experiment in government is unsuccessful, it’s always expanded.

LAMB: What is it that government does that you like?

FRIEDMAN: I would like government to enforce law and order. I would like government to provide the rules, effectively, that guide our life, that determine what’s proper and to do very little other than that.

LAMB: What kind of a grade do you give to the American system of government today? How is it working?

FRIEDMAN: As it was in 1928 or as it is in 1994? It’s a great system. The fundamental system is great, but it hasn’t been working in the last 30 years.

LAMB: Why not?

FRIEDMAN: Because we’ve been departing from its fundamental principles. The founders of country believed in individual freedom, believed in leaving people be, letting them be alone to do whatever they wanted to do. But our government has been increasingly departing from those constitutional principles. You know, there’s a provision in the constitution that Congress shall not interfere with interstate commerce. That provision had some meaning at one time, but it has no meaning now at all. Our courts have ruled that anything you can think of is interstate commerce, and so the government exercises extensive control over things that it has no business interfering with.

LAMB: What do you think of the Federal Reserve Board today?

FRIEDMAN: I’ve long been in favor of abolishing it. There’s no institution in the United States that has such a high public standing and such a poor record of performance.

LAMB: What did Arthur Burns think of that?

FRIEDMAN: He didn’t like that very much, but, needless to say, I didn’t hesitate to say it to him. Look, the federal reserve system was established in 1914, started operation in 1914. It presided over a doubling of prices during World War I. It produced a major collapse in 1921. It had a good period from about 1922 to about 28. Then it undertook actions which led to a recession in 1929 and 30, and it converted that recession by its actions into the Great Depression. The major villain in the Great Depression was, in my opinion, unquestionably the federal reserve system. Since that time, it presided over a doubling of prices during World War II. It financed the inflation of the 1970s. On the whole, it has a very poor record. It’s done far more harm than good.

LAMB: What do you say to the people who say and write that it’s just a matter of time until it all comes tumbling down, meaning the tremendous debt we have in this country will catch up with us.

FRIEDMAN: The debt is not the problem. The debt is not the problem. You’ve got to compare a debt with the assets which correspond to it. It need not come tumbling down. Whether it comes tumbling down will depend on what we do. If we continue to expand the role of government, if we let government grow beyond limit, it will come tumbling down. But that isn’t going to happen. The attitudes of the American people have changed, and they’ve become aware of the fact that government is too big, too intrusive, too extensive, and I have a great deal of confidence in the American people that they’re going to see to it that doesn’t happen.

LAMB: But if you were sitting around with experts in a room and they said, “Let’s look at the future,” where are the problems? We listen every day on the radio and read in the newspapers that it’s just a matter of time.

FRIEDMAN: I think that’s wrong. Fundamentally, what’s been happening is that in the period I talked about from 1928 to now, we have been starving the successful part of our society, namely, the free private enterprise system, and we have been feeding the failure. Government controls over 50 percent of the output of the country, but thank God government is not efficient. Most of that is wasted.

LAMB: Another one of our “Booknotes” guests in this series is John Kenneth Galbraith. If you put the two of you in a room together, which one’s the happiest with what’s happened over the last 50 years?

FRIEDMAN: Ken would be much happier than I would be.

LAMB: Why would he be?

FRIEDMAN: Because he’s a socialist.

LAMB: Why do you think he’s happier and why do you think his side’s been more successful?

FRIEDMAN: Because the story they tell is a very simple story, easy to sell. If there’s something bad, it must be an evil person who’s done it. If you want something done, you’ve got to do it. You’ve got to have government step in and do it. The story Hayek and I want to tell is a much more sophisticated and complicated story, that somehow or other there exists this subtle system in which, without any individual trying to control it, there is a system under which people in seeking to promote their own interests will also promote the well-being of the country — Adam Smith’s invisible hand. Now, that’s a very sophisticated story. It’s hard to understand how you can get a complex interrelated system without anybody controlling it. Moreover, the benefits from government tend to be concentrated; the costs tend to be disbursed. To each farmer, the subsidy he gets from the government means a great deal. To each of a much larger number of consumers, it costs very little. Consequently, those who feed at the trough of government tend to be politically much more powerful than those who provide it with the wherewithal.

LAMB: During your lifetime, who are the leaders you think have been the most loyal to their beliefs and have done the best job?

FRIEDMAN: I would certainly put Ronald Reagan high on that list.

LAMB: What do you say to David Frum’s thesis? Have you read Dead Right?

FRIEDMAN: Yes. He’s quite right. I agree with it.

LAMB: That conservatives basically buy off now . . .

FRIEDMAN: I’m not a conservative. I never have been a conservative. Hayek was not a conservative. The book that follows this one in Hayek’s list was The Constitution of Liberty, a great book, and he has an appendix to it entitled “Why I Am not a Conservative.” We are radicals. We want to get to the root of things. We are liberals in the true meaning of that term — of and concerned with freedom. We are not liberals in the current distorted sense of the term — people who are liberal with other people’s money.

LAMB: You write about Thomas Jefferson. What was he?

FRIEDMAN: I would certainly put him very high on the list. He was a great man. There’s no question about that, and he was certainly a believer in freedom. He was not a conservative.

LAMB: Would he have been a liberal?

FRIEDMAN: Yes, in my sense, not in the corrupted sense of today.

LAMB: But what’s confusing as you watch today’s people who embrace him, you have the Jefferson-Jackson dinners every year for the Democratic Party, and Lincoln is embraced by both sides. What was he?

FRIEDMAN: He’s much more difficult to characterize because his role in our history had to do with the Civil War, and that’s not something to be characterized in terms of socialist or liberal or conservative.

LAMB: Is Thomas Jefferson a Democrat as we know the Democratic Party today?

FRIEDMAN: No, he would not.

LAMB: What would he be today?

FRIEDMAN: He would be a libertarian.

LAMB: A member of the Libertarian Party?

FRIEDMAN: Not necessarily. See, I’m a libertarian in philosophy, but, as I say, I’m a libertarian with a small “l” and a Republican with a capital “r.”

LAMB: You supported and were close to Barry Goldwater.

FRIEDMAN: Yes, I was.

LAMB: What was he?

FRIEDMAN: A libertarian in philosophy, not in party.

LAMB: What is Bill Clinton?

FRIEDMAN: Oh, he’s a socialist.

LAMB: Defined as being what?

FRIEDMAN: As somebody who believes that the way to achieve good things is to have government do it. You can’t think of a more socialist program than the health care program that he tried to get us to adopt.

LAMB: You said earlier in the discussion when we were talking about Rutgers that the worst way to go is to take care of the bottom up. Explain that.

FRIEDMAN: Not to take care of them in the sense of giving them a minimum income, but to believe that the progress of society is going to come from the bottom.

LAMB: So how do you take care of someone who is in the lower third?

FRIEDMAN: In my book Capitalism and Freedom I propose something called a negative income tax, of getting rid of all of the welfare programs we now have, but replace them by essentially a minimum income.

LAMB: But you also say that’s not going to happen very quickly.

FRIEDMAN: Well, we’re moving toward that. The earned income credit is in that line.

LAMB: What will that do?

FRIEDMAN: What we’re not going to move toward, the place we’re wrong is with all of the special welfare programs we have — food stamps, aid to families with dependent children. There are probably a hundred such programs, and what I’ve argued is that we ought to replace that whole ragbag of programs with a single negative income tax.

LAMB: In your lifetime, have you ever had a theory that proved to be wrong? Do you ever go back and say, “I was wrong”?

FRIEDMAN: Oh, yes, sure.

LAMB: What was it?

FRIEDMAN: During World War II when I was at the Treasury, I was essentially a Keynesian, as I believed that the way to control inflation was by controlling government spending. I paid very little attention to money. Only after World War II when I started to work in the field of money did I come to a different conclusion. Now, I believe Keynes was a great man. He was a great economist, but I think his theory is wrong.

LAMB: And his theory, basically stated, is?

FRIEDMAN: Basically stated, the fundamental element of it, is that what matters is spending and what matters in particular is government spending and that government must play a major role in guiding the society. He was a liberal in the 19th century sense, but he was also an elitist, and he believed that there was a group of able public-spirited intellectuals who should be given charge of society.

LAMB: When people look at Milton Friedman 25 years from now — you’ll probably still be here . . .

FRIEDMAN: I won’t be here.

LAMB: What do you want them to remember? Do you want them to remember you as a writer, as a teacher, as a philosopher, as an economist?

FRIEDMAN: Again, I want them to remember me as an economist.

LAMB: And what principle do you want them to remember the most?

FRIEDMAN: That’s hard to say because there are quite a number. I mentioned The Theory of the Consumption Function, which is a very technical book but which yet, I believe, has had a good deal of influence within the discipline of economics. But I really don’t know how to answer that question. I think that people 25 years from now will have to answer it, not me.

LAMB: Milton Friedman has been our guest, and he wrote the introduction of this 50th anniversary edition of F. A. Hayek’s book The Road to Serfdom, and he has a few books of his own. We thank you very much for joining us.

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